(ICON)
Prudential
Government
Income
Fund, Inc.
SEMI
ANNUAL
REPORT
Aug. 31, 1995
(LOGO)
<PAGE>
Prudential Government Income Fund, Inc.
Performance At A Glance.
This year, government bond investors have generally enjoyed healthy returns.
Bond prices and yields move in opposite directions so in the wake of falling
interest rates, prices rose higher and bond yields fell. What's behind the
move in rates? Inflation appears to be tamed and economic growth has
moderated. In the past six months, we are pleased to announce the
Prudential Government Income Fund, Inc. has returned more than the
average general U.S. government fund bond fund measured by Lipper
Analytical Services.
<TABLE>
Cumulative Total Returns1 As of 8/31/95
<CAPTION>
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A 11.4% 53.4% N/A 56.7%
Class B 10.7 47.7 112.2 124.7
Class C 10.8 N/A N/A 10.8
Lipper Gen. U.S. Govt. Bonds3 9.9 50.3 121.1 N/A
<CAPTION>
Average Annual Total Returns1 As of 9/30/95
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A 6.9% 8.0% N/A 7.5%
Class B 5.7 7.9 7.9% 8.1
Class C 9.8 N/A N/A 9.9
</TABLE>
<TABLE>
Six-Month 30-Day
Dividends/Share SEC-Yield
<S> <C> <C> <C>
Your Class A $0.30 5.84%
Dividend Class B $0.27 5.40
As of 8/31/95 Class C $0.27 5.53
</TABLE>
An investment in the Fund is neither insured nor guaranteed by the U.S.
government. Past performance is no guarantee of future results. Investment
return and principal value will fluctuate so an investor's shares, when
redeemed, may be worth more or less than their original cost.
1Source: Prudential Mutual Fund Management and Lipper Analytical Services.
The cumulative total returns do not take into account sales charges. The
average annual total returns do take into account sales charges. The Fund
charges a maximum sales load of 4% for Class A shares. Class B shares are
subject to a contingent deferred sales charge of 5%, 4%, 3%, 2%, 1% and 1%,
respectively, for six years. Class C shares charge a CDSC of 1% for one
year. Class B shares will automatically convert to Class A shares on a
quarterly basis, approximately seven years after purchase.
2Inception dates: class A 1/22/90; class B 4/22/85; class C 8/1/94.
3The Lipper category measures the average of 162 funds for one year, 78
funds for five years, 25 funds for 10 years and 23 funds since inception
of the Class B shares on 4/22/85.
How Investments Compared.
(As of 8/31/95)
(GRAPH)
Source: Lipper Analytical Services.
Financial markets change, so a mutual fund's past performance should
never be used to predict future results. The risks to each of the
investments listed above are different -- we provide 12-month total
returns for several Lipper mutual fund categories to show you that
reaching for higher yields means tolerating more risk. The greater
the risk, the larger the potential reward or loss. In addition, we've
added historical 20-year average annual returns. These returns assume
the reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Smaller capitalization
stocks offer greater potential for long-term growth but may be more
volatile than larger capitalization stocks. Investors receive higher
historical total returns from stocks than from most other investments.
General Bond Funds provide more income than stock funds, which can help
smooth out their total returns year by year. But their prices still fluctuate
(sometimes a good deal) and their returns are historically lower than those
of stock funds.
General Municipal Debt Funds invest in bonds issued by state
governments, state agencies and/or municipalities. This investment provides
income that is usually exempt from federal and state income taxes. (20-year
returns are not available.)
Money Market Funds attempt to preserve a constant share value; they don't
fluctuate much in price but their returns are generally among the lowest
of the major investment categories.
*19 years for General Muni Debt Funds.
<PAGE>
Barbara Kenworthy, Fund Manager
(PHOTO)
Portfolio
Manager's Report
The Prudential Government Income Fund is designed for investors who want
high current return, primarily from bonds issued or guaranteed by the U.S.
government or its agencies. At least 65% of the Fund's total assets are
invested in U.S. government securities.
Strategy Session.
Largely by adjusting the portfolio's duration (a measure of its sensitivity
to interest rate changes), we have captured better returns both when
interest rates were rising last year and this year, when they have been
falling. In plain English, we attempted to reduce the Fund's average
effective maturity when the markets were down and increase it when the
markets were up. Short maturity bonds have shorter durations -- their
prices fall less when interest rates rise. Long-maturity bonds have longer
durations -- their prices rise more when interest rates fall.
That said, on average, our duration will usually remain in the 5 to 6 year
range -- the intermediate-term part of the yield curve where we pick up
incremental yield without the volatility associated with a long-term fund.
In addition, we monitor the bond markets closely to determine which sectors
are more valuable than others at any given time. For instance, when interest
rates began falling, we quickly shifted assets out of mortgage backed
securities because they begin to suffer from prepayment risk whenever
homeowners might be tempted to pay off their mortgages early. Throughout
the second and third quarters, we kept the proportion of assets in
mortgages at about 43%, slightly lower than earlier in the year.
Here's how the markets performed this year, as measured by the Lehman
Brothers bond indexes: the average U.S. government bond was up 10.8%,
the average mortgage- backed security was up 10.9% and the average
one-month Treasury bill was up 3.2%. Those figures include both coupon
income and price appreciation.
Overview.
Barbara Kenworthy has managed the Prudential Government Income Fund for
a year now. She actively trades between the different government bond
sectors and maturities, seeking high yields and capital appreciation
potential wherever those opportunities may exist.
Sector Breakdown.
(CHART)
<PAGE>
What Went Well.
We Lengthened Duration.
We moved aggressively to take advantage of the precipitous fall in interest
rates, and our moves were largely successful: We lengthened duration to over
6.0 years when interest rates were falling. This translated to an effective
maturity of 8.9 years and placed us squarely among the intermediate-term
funds in our Lipper category. This maturity range carries risk if interest
rates reverse course, but we felt confident they would fall for most of the
spring and summer, and we were right.
We Purchased Stripped
Treasury Bonds.
These are created by "stripping" off the coupons from Treasury securities
and selling the principal as a zero-coupon bond, at a deep discount to its
face value. Treasury strips are typically outstanding performers in a bond
rally; they react just as violently to interest rate changes in the other
direction, so we sold many of them when interest rates stabilized in late
summer.
Our low mortgage weighting helped. By trimming mortgage backed
securities, we avoided a lot of prepayment risk late in spring and
summer. We purchased U.S. government agency securities instead.
These have higher coupons than U.S. Treasury securities, without
much more credit risk.
And Not So Well.
If we had owned a crystal ball, we would done two things differently:
- -- First, we would have lengthened maturities sooner. While we expected
the rally, its magnitude was a surprise, especially the breathtaking
drop in long-term rates in May to nearly 6.5% from 7.3%.
- -- Second, we remained optimistic slightly longer than we should have.
We would have reduced maturities sooner this summer if we realized how
soon the market would stagnate.
Looking Ahead.
The economy doesn't appear to be fit enough to spark inflation, but it's
not weak enough to make the bond vigilantes rejoice, either. So we're
expecting to collect coupon income--and perhaps a bit of price
appreciation--from the bond market for most of the rest of the year.
We'll also be looking to shift assets between government sectors, looking
for the better yields in any given week. This is not to say we're planning
to become aggressive traders, however. Instead, we will keep one eye on
yields to keep our income investors happy, and the other on price appreciation
in an attempt to keep our total returns higher than the averages.
1
<PAGE>
President's Letter October 11, 1995
(PHOTO)
Dear Shareholder:
We hope you like the fresh look and information we've given your shareholder
letter. We've also introduced another feature, called Getting the Most Out
of Your Prudential Mutual Fund, which will appear from time to time at the
back of your report. Look for topics like "Understanding Risk & Reward" as
well as easy-to-understand explanations of financial terms. Why are we
providing such information? Because at Prudential Mutual Funds, we believe an
informed investor makes smart investment decisions.
On the Hill
As an informed investor, you should know about the "American Dream Savings
Account" that is part of the federal budget package now under debate in the
Senate. It is a type of Individual Retirement Account that offers a
common-sense approach to long-term saving. Investors should like it
because --
- --You can withdraw funds -- without penalty -- to pay for certain expenses
like buying a first home, medical care or educational needs;
- --All account earnings would accumulate tax-free, not merely tax-deferred
like the current IRA;
- --You can make contributions past age 70 1/2, instead of having to take
distributions as the current law requires.
Of course, the federal budget process is never easy and while we hope
this measure is adopted, there's no way of knowing if it will be. So why
not let your Senator and/or Representative know your opinion today?
Simply call 202-224-3121.
In Closing
One final note: if you're a Class B shareholder of Prudential Mutual Funds,
you'll begin noticing a change on your statements once you've held your
shares for seven years. At that time, they will automatically begin to
convert to Class A shares on a quarterly basis. Since Class A shares
carry lower annual distribution charges than Class B shares, your total
returns will be higher after the conversion than they would have been
without it. Conversions started earlier this year and beginning in December
they will take place during each calendar quarter -- December, March, June
and September. It's our way of thanking you for your loyalty -- and
rewarding you for maintaining a long-term investment program by helping
you earn more total investment return on your Prudential Mutual Fund.
I hope you'll find this information useful as you work with your financial
advisor or registered representative to develop your personal investment
plan.
Thank you for choosing Prudential Mutual Funds for your mutual fund
investment.
Sincerely,
Richard A. Redeker
President
2
<PAGE>
Portfolio of Investments as of August 31, 1995 (Unaudited) PRUDENTIAL
GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--97.1%
- ------------------------------------------------------------
U.S. Government Agency Mortgage Pass-Throughs--40.3%
Federal Home Loan Mortgage Corp.,
$44,814 7.50%, 2/01/22 - 4/01/25 $ 44,994,996
79,875 8.00%, 1/01/22 - 9/01/24 81,497,690
7,339 8.50%, 6/01/07 - 4/01/20 7,594,929
3,531 11.50%, 10/01/19 3,891,223
Federal National Mortgage Assoc.,
25,055 6.50%, 10/01/23 - 6/01/24 24,068,386
54,638 7.00%, 2/01/24 - 5/01/24 53,699,062
42,516 7.50%, 4/01/07 - 5/01/10 43,206,652
52,851 8.50%, 6/01/17 - 3/01/25 54,543,141
12,113 9.00%, 4/01/25 12,623,727
Government National Mortgage
Assoc.,
57,826 6.50%, 5/15/23 - 10/15/24 55,422,202
92,712 7.00%, 2/15/09 - 11/15/24 91,118,648
29,170 7.50%, 5/15/02 - 6/15/25 29,348,448
46,309 8.00%, 7/15/16 - 3/15/24 47,771,856
30,377 9.00%, 4/15/01 - 12/15/09 31,829,774
29,309 9.50%, 10/15/09 - 12/15/17 31,362,608
Government National Mortgage
Assoc. II,
6,061 9.50%, 5/20/18 - 8/20/21 6,358,100
---------------
Total U.S. Government Agency
Mortgage Pass-Throughs
(cost $599,256,734) 619,331,442
- ----------------------------------------------------------------
U.S. Government Obligations--38.8%
United States Treasury Bonds,
100,000 8.75%, 8/15/20 123,266,000
40,000 10.75%, 2/15/03 50,543,600
68,000 12.00%, 8/15/13 99,556,080
143,000(b) 12.50%, 8/15/14 218,566,920
28,000(b) 14.00%, 11/15/11 44,467,360
United States Treasury Note,
50,000 7.50%, 2/15/05 54,047,000
United States Treasury Strip,
35,000 Zero Coupon, 5/15/20 6,380,500
---------------
Total U.S. Government Obligations
(cost $576,531,401) 596,827,460
U.S. Government Agency Securities--15.1%
Federal Home Loan Mortgage Corp.,
$34,000 6.71%, 6/11/02 $ 34,015,980
24,810 6.99%, 5/24/02 25,077,454
25,000 8.20%, 1/16/98 25,625,000
Federal National Mortgage Assoc.,
45,000 6.55%, 9/12/05 45,063,450
40,000 6.85%, 5/26/00 40,456,400
3,011 Trust 1991 G-37 Class C, (I/O(a)) 97,858
Israel AID,
37,600 Zero Coupon, 5/15/15 9,298,480
37,600 Zero Coupon, 5/15/16 8,632,960
Resolution Funding Corp.,
50,000 Zero Coupon, 7/15/20 8,713,500
Tennessee Valley Authority,
35,000 6.235%, 7/15/45 34,871,550
---------------
Total U.S. Government Agency
Securities (cost $228,749,924) 231,852,632
- ----------------------------------------------------------------
Asset-Backed Securities--2.6%
John Deere Owner Trust,
40,000 Series 1995-2A, 5.97%, 5/15/02
(cost $39,993,360) 39,987,500
- ----------------------------------------------------------------
Adjustable Rate Mortgage Pass-Throughs--0.3%
Ryland Mortgage Securities
Corporation,
Mortgage Participation Securities,
Series 1993-3, Class A-3,
7.57%, 9/25/24
5,430 (cost $5,538,598) 5,368,923
------------------------------------------------------------
Total long-term investments
(cost $1,450,070,017) 1,493,367,957
---------------
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Portfolio of Investments as of August 31, 1995 (Unaudited)
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ----------------------------------------------------------------
SHORT-TERM INVESTMENTS--2.8%
- ----------------------------------------------------------------
Commercial Paper--2.8%
Associates Corp. of North America,
$9,758 5.86%, 9/01/95 $ 9,758,000
Dai-Ichi Kangyo Bank, Ltd.,
32,480 5.875%, 9/01/95 32,480,000
---------------
Total Commercial Paper
(cost $42,238,000) 42,238,000
------------------------------------------------------------
Total Investments, Before Outstanding Option Written--99.9%
(cost $1,492,308,017; Note 4) 1,535,605,957
Contracts(c)
- ---------
OUTSTANDING PUT OPTION WRITTEN
United States Treasury Note,
expiring October '95 @ $105.23
50 (premium received $234,375) (85,937)
- ----------------------------------------------------------------
Total Investments, Net of Outstanding Option
Written--99.9% 1,535,520,020
Other assets in excess of
liabilities--0.1% 2,132,373
---------------
Net Assets--100% $ 1,537,652,393
---------------
---------------
- ---------------
AID--Agency for International Development.
I/O--Interest Only.
(a) REMIC--Real Estate Mortgage Investment Conduit.
(b) Principal amount segregated as collateral for options written. Approximate
aggregate value of segregated securities--$263,000,000.
(c) One contract equals $10,000 of par value.
- --------------------------------------------------------------------------------
4 See Notes to Financial Statements.
<PAGE>
<PAGE>
Statement of Assets and Liabilities (Unaudited) PRUDENTIAL GOVERNMENT INCOME
FUND
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S>
<C>
Assets
August 31, 1995
Investments, at value (cost
$1,492,308,017)...............................................................
$1,535,605,957
Cash.........................................................................
............................. 32,984
Receivable for investments
sold...........................................................................
45,278,200
Interest
receivable...................................................................
.................... 9,452,907
Receivable for Fund shares
sold...........................................................................
561,663
Deferred expenses and other
assets........................................................................
323,026
---------------
Total
assets.......................................................................
.................... 1,591,254,737
---------------
Liabilities
Payable for investments
purchased....................................................................
..... 44,921,250
Payable for Fund shares
reacquired...................................................................
..... 3,688,397
Accrued
expenses.....................................................................
..................... 2,650,700
Dividends
payable......................................................................
................... 1,059,064
Management fee
payable......................................................................
.............. 646,455
Distribution fee
payable......................................................................
............ 550,541
Outstanding call option written, at value (premiums received
$234,375).................................... 85,937
---------------
Total
liabilities..................................................................
.................... 53,602,344
---------------
Net
Assets.......................................................................
......................... $1,537,652,393
---------------
---------------
Net assets were comprised of:
Common stock, at
par..........................................................................
......... $ 1,711,677
Paid-in capital in excess of
par.......................................................................
1,640,503,786
---------------
1,642,215,463
Accumulated net realized losses on
investments.........................................................
(148,009,448 )
Net unrealized appreciation on
investments.............................................................
43,446,378
---------------
Net assets at August 31,
1995.........................................................................
.... $1,537,652,393
---------------
---------------
Class A:
Net asset value and redemption price per share
($915,779,454 / 101,971,531 shares of common stock issued and
outstanding).......................... $8.98
Maximum sales charge (4.0% of offering
price)..........................................................
.37
---------------
Maximum offering price to
public.......................................................................
$9.35
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($621,267,120 / 69,128,757 shares of common stock issued and
outstanding)........................... $8.99
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($605,819 / 67,409 shares of common stock issued and
outstanding)................................... $8.99
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
5
<PAGE>
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Statement of Operations (Unaudited)
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
Net Investment Income August 31, 1995
---------------
<S> <C>
Income
Interest................................. $ 60,956,414
Income from securities loaned-net........ 118,813
---------------
61,075,227
---------------
Expenses
Distribution fee--Class A................ 672,715
Distribution fee--Class B................ 2,786,004
Distribution fee--Class C................ 1,562
Management fee........................... 3,931,912
Transfer agent's fees and expenses....... 1,241,000
Custodian's fees and expenses............ 600,000
Franchise taxes.......................... 314,000
Reports to shareholders.................. 127,000
Registration fees........................ 47,000
Audit fee................................ 32,000
Legal fees............................... 29,000
Insurance expense........................ 26,000
Directors' fees.......................... 24,000
Miscellaneous............................ 5,255
---------------
Total expenses........................ 9,837,448
---------------
Net investment income....................... 51,237,779
---------------
Realized and Unrealized
Gain on Investments
Net realized gain:
Investment transactions.................. 25,140,083
Written option transactions.............. 182,032
---------------
25,322,115
---------------
Net change in unrealized appreciation on:
Investments.............................. 44,094,257
Written options.......................... 148,438
---------------
44,242,695
---------------
Net gain on investments..................... 69,564,810
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 120,802,589
---------------
---------------
</TABLE>
PRUDENTIAL GOVERNMENT INCOME FUND
Statement of Changes in Net Assets (Unaudited)
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year Ended
Increase (Decrease) Ended February 28,
in Net Assets August 31, 1995 1995
---------------- --------------
<S> <C> <C>
Operations
Net investment income....... $ 51,237,779 $ 114,223,550
Net realized gain (loss) on
investment
transactions............. 25,322,115 (93,893,429)
Net change in unrealized
appreciation on
investments.............. 44,242,695 (39,470,823)
-------------- --------------
Net increase (decrease) in
net assets resulting from
operations............... 120,802,589 (19,140,702)
-------------- --------------
Dividends to shareholders
from net investment
income
(Note 1)
Class A.................. (30,507,134) (7,117,500)
Class B.................. (20,717,784) (107,101,716)
Class C.................. (12,861) (4,334)
-------------- --------------
(51,237,779) (114,223,550)
-------------- --------------
Fund share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
subscribed............... 37,545,612 79,769,541
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........ 29,425,496 64,092,911
Cost of shares reacquired... (175,964,452) (687,645,132)
-------------- --------------
Decrease in net assets from
Fund share
transactions............. (108,993,344) (543,782,680)
-------------- --------------
Total decrease................. (39,428,534) (677,146,932)
Net Assets
Beginning of period............ 1,577,080,927 2,254,227,859
-------------- --------------
End of period.................. $1,537,652,393 $1,577,080,927
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
6 See Notes to Financial Statements.
<PAGE>
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
Prudential Government Income Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. Investment operations commenced on April 22, 1985.
The Fund's investment objective is to seek a high current return. The Fund will
seek to achieve this objective primarily by investing in U.S. Government
securities, including U.S. Treasury Bills, Notes, Bonds and other debt
securities issued by the U.S. Treasury, and obligations issued or guaranteed by
U.S. Government agencies or instrumentalities, and by engaging in various
derivative transactions such as the purchase and sale of put and call options.
- -----------------------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: The Fund values portfolio securities on the basis of current
market quotations provided by dealers or by a pricing service approved by the
Board of Directors, which uses information such as quotations from dealers,
market transactions in comparable securities, various relationships between
securities and calculations on yield to maturity in determining values. Options
and financial futures contracts listed on exchanges are valued at their closing
price on the applicable exchange. When market quotations are not readily
available, a security is valued at fair value as determined in good faith by or
under the direction of the Board of Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with repurchase agreement transactions, the Fund's custodian, or
designated subcustodians as the case may be under triparty repurchase
agreements, takes possession of the underlying collateral securities, the value
of which exceeds the principal amount of the repurchase transaction, including
accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. If the seller defaults and the value
of the collateral declines or if bankruptcy proceedings are commenced with
respect to the seller of the security, realization of the collateral by the Fund
may be delayed or limited.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates with respect to securities which the Fund currently
owns or intends to purchase. The Fund's principal reason for writing options is
to realize, through receipt of premiums, a greater current return than would be
realized on the underlying security alone. When the Fund purchases an option,
it
pays a premium and an amount equal to that premium is recorded as an investment.
When the Fund writes an option, it receives a premium and an amount equal to
that premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost of the purchase in
determining whether the Fund has realized a gain or loss. The difference between
the premium and the amount received or paid on effecting a closing purchase or
sale transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions. Gain or loss on written options is presented separately as net
realized gain (loss) on written option transactions.
The Fund, as a writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Fund bears the market risk of an unfavorable change in the price of the security
underlying the written option. The Fund, as purchaser of an option, bears the
risk of the potential inability of the counterparties to meet the terms of their
contracts.
Dollar Rolls: The Fund enters into mortgage dollar rolls in which the Fund sells
mortgage securities for delivery in the current month, realizing a gain or loss
and simultaneously contracts to repurchase somewhat similar (same type, coupon
and maturity) securities on a specified future date. During the roll period, the
Fund forgoes principal and interest paid on the securities. The Fund is
compensated by the interest earned on the cash proceeds of the initial sale and
by the lower repurchase price at the future date. The difference between the
sales proceeds and the lower repurchase price is recorded as interest income.
The Fund maintains a segregated account, the dollar value of which is at least
equal to its obligations, in respect of dollar rolls. There were no dollar rolls
outstanding as of August 31, 1995.
Securities Lending: The Fund may lend its U.S. Government securities to
broker-dealers or government securities dealers. The loans are secured by
collateral at least equal at all times to the market value of the securities
- --------------------------------------------------------------------------------
7
<PAGE>
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
loaned. The Fund may bear the risk of delay in recovery of, or even loss of
rights in, the securities loaned should the borrower of the securities fail
financially. The Fund receives compensation for lending its securities in the
form of fees or it retains a portion of interest on the investment of any cash
received as collateral. The Fund also continues to receive interest on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of the
Fund. There were no loans outstanding as of August 31, 1995.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. Net investment income (other than distribution fees) and
unrealized and realized gains or losses are allocated daily to each class of
shares based upon the relative proportion of net assets of each class at the
beginning of the day.
Dividends and Distributions: The Fund declares daily and pays monthly dividends
from net investment income. The Fund will distribute at least annually any net
capital gains in excess of loss carryforwards. Dividends and distributions are
recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income to its shareholders.
Therefore, no federal income tax provision is required.
- ------------------------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the Fund's average daily net assets up to $3 billion and
.35 of 1% of the average daily net assets of the Fund in excess of $3 billion.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), who acts as the distributor of the Class A shares of the Fund
and Prudential Securities Incorporated (``PSI''), who acts as distributor of the
Class B and Class C shares of the Fund (collectively the ``Distributors''). The
Fund compensates the Distributors for distributing and servicing the Fund's
Class A, Class B and Class C shares, pursuant to plans of distribution (the
``Class A, B and C Plans'') regardless of expenses actually incurred by them.
The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund compensates PMFD for its expenses with
respect to Class A shares, at an annual rate of up to .30 of 1% of the average
daily net assets of the Class A shares. Such expenses under the Class A Plan
were .15 of 1% of the average daily net assets of the Class A shares for the
year ended .
Pursuant to the Class B Plan, the Fund compensates PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to 1% of the average daily net assets up to $3 billion, .80 of 1% of the
next $1 billion of such net assets and .50 of 1% over $4 billion of the average
daily net assets of the Class B shares. Such expenses under the Class B Plan
were charged at .825 of 1% of the average daily net assets of Class B shares.
Pursuant to the Class C Plan, the Fund compensates PSI for its
distribution-related expenses with respect to Class C shares at an annual rate
of up to 1% of the average daily net assets of the Class C shares. Such expenses
under Class C Plan were charged at .75 of 1% of average daily net assets.
PMFD has advised the Fund that it has received approximately $76,000 in
front-end sales charges resulting from sales of Class A shares during the period
ended August 31, 1995. From these fees, PMFD paid such sales charges to dealers
which in turn paid commissions to salespersons.
PSI has advised the Fund that for the period ended August 31, 1995 it received
approximately $766,000 in contingent deferred sales charges imposed upon
redemptions by certain Class B and Class C shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- --------------------------------------------------------------------------------
8
<PAGE>
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the period ended August 31,
1995, the Fund incurred fees of approximately $972,000 for the services of PMFS.
As of August 31, 1995, approximately $181,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations also include
certain out of pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the period ended August 31, 1995 were $1,063,645,384 and $1,144,015,526,
respectively.
The federal income tax cost basis of the Fund's investments, at August 31, 1995
was the same as for book purposes and, accordingly, net unrealized appreciation
for federal income tax purposes was $43,446,378
(gross unrealized appreciation-$48,838,509; gross unrealized
depreciation-$5,392,131).
The Fund had a capital loss carryforward as of February 28, 1995 of
approximately $140,517,000 of which $34,965,000 expires in 1998, $41,965,000
expires in 1999 and $63,587,000 expires in 2003. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of such amounts.
Transactions in written options during the period ended August 31, 1995 were as
follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
<S> <C> <C>
--------- ----------
Options written....................... 260 $1,257,811
Options terminated in closing purchase
transactions........................ (150) (840,624)
Options expired....................... (60) (182,812)
--------- ----------
Options outstanding at August 31,
1995................................ 50 $ 234,375
--------- ----------
--------- ----------
</TABLE>
The average balance of dollar rolls outstanding during the period ended August
31, 1995 was approximately $14,801,000.
- ------------------------------------------------------------------------------
Note 5. Capital
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 4.0%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares automatically
convert to Class A shares on a quarterly basis approximately seven years after
purchase. A special exchange privilege is also available for shareholders who
qualified to purchase Class A shares at net asset value.
There are 2 billion shares of common stock, $.01 par value per share, divided
into three classes, designated Class A, B and Class C common stock, each of
which consists of 666,666,666.67 authorized shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------- ------------ ---------------
<S> <C> <C>
Six months ended August 31, 1995:
Shares sold...................... 1,525,197 $ 13,525,537
Shares issued in reinvestment of
dividends...................... 1,990,560 17,659,959
Shares reacquired................ (10,929,886) (96,570,860)
------------ ---------------
Net decrease in shares
outstanding before
conversion..................... (7,414,129) (65,385,364)
Shares sold upon conversion from
Class B........................ 7,978,834 70,637,633
------------ ---------------
Net increase in shares
outstanding.................... 564,705 $ 5,252,269
------------ ---------------
------------ ---------------
Year ended February 28, 1995:
Shares sold...................... 1,650,843 $ 14,143,438
Shares issued in reinvestment of
dividends...................... 517,170 4,416,369
Shares reacquired................ (3,871,087) (33,161,047)
------------ ---------------
Net decrease in shares
outstanding before
conversion..................... (1,703,074) (14,601,240)
Shares sold upon conversion from
Class B........................ 97,449,952 825,401,064
------------ ---------------
Net increase in shares
outstanding.................... 95,746,878 $ 810,799,824
------------ ---------------
------------ ---------------
<CAPTION>
Class B
- ---------------------------------
<S> <C> <C>
Six months ended August 31, 1995:
Shares sold...................... 2,661,466 $ 23,522,953
Shares issued in reinvestment of
dividends...................... 1,325,342 11,754,680
Shares reacquired................ (8,975,135) (79,273,579)
------------ ---------------
Net decrease in shares
outstanding before
conversion..................... (4,988,327) (43,995,946)
Shares reacquired upon conversion
into Class A................... (7,973,287) (70,637,633)
------------ ---------------
Net decrease in shares
outstanding.................... (12,961,614) $ (114,633,579)
------------ ---------------
------------ ---------------
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE>
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- --------------------------------- ------------ ---------------
Year ended February 28, 1995:
<S> <C> <C>
Shares sold...................... 7,582,662 $ 65,420,737
Shares issued in reinvestment of
dividends...................... 5,979,498 59,672,362
Shares reacquired................ (75,332,177) (654,474,203)
------------ ---------------
Net decrease in shares
outstanding before
conversion..................... (61,770,017) (529,381,104)
Shares reacquired upon conversion
into Class A................... (97,449,952) (825,401,064)
------------ ---------------
Net decrease in shares
outstanding.................... (159,219,969) $(1,354,782,168)
------------ ---------------
------------ ---------------
<CAPTION>
Class C
- ------------------
<S> <C> <C>
Six months ended August 31, 1995:
Shares sold...................... 55,688 $ 497,122
Shares issued in reinvestment of
dividends...................... 1,217 10,857
Shares reacquired................ (13,217) (120,013)
------------ ---------------
Net increase in shares
outstanding.................... 43,688 $ 387,966
------------ ---------------
------------ ---------------
August 1, 1994* through
February 28, 1995:
Shares sold...................... 24,418 $ 205,366
Shares issued in reinvestment of
dividends...................... 498 4,180
Shares reacquired................ (1,195) (9,882)
------------ ---------------
Net increase in shares
outstanding.................... 23,721 $ 199,664
------------ ---------------
------------ ---------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
10
<PAGE>
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
- -----------------------------------------------------------------------
Six Months
Ended
Years Ended February 28/29,
August 31,
- --------------------------------------------------------
1995 1995 1994
1993 1992 1991
---------- --------
- ------- ------- ------- -------
<S> <C> <C> <C>
<C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 8.59 $ 9.13 $
9.40 $ 9.17 $ 9.02 $ 9.00
---------- --------
- ------- ------- ------- -------
Income from investment operations
Net investment income...................... 0.30 0.59
0.61 0.66 0.68 0.69
Net realized and unrealized gain (loss) on
investment transactions................. 0.39 (0.54)
(0.25) 0.35 0.37 0.26
---------- --------
- ------- ------- ------- -------
Total from investment operations........ 0.69 0.05
0.36 1.01 1.05 0.95
---------- --------
- ------- ------- ------- -------
Less distributions
Dividends from net investment income....... (0.30) (0.59)
(0.61) (0.66) (0.68) (0.69)
Distributions in excess of accumulated
gains................................... -- --
(0.02) -- -- --
Distributions from paid-in capital in
excess of par........................... -- --
-- (0.12) (0.22) (0.24)
---------- --------
- ------- ------- ------- -------
Total distributions..................... (0.30) (0.59)
(0.63) (0.78) (0.90) (0.93)
---------- --------
- ------- ------- ------- -------
Net asset value, end of period............. $ 8.98 $ 8.59 $
9.13 $ 9.40 $ 9.17 $ 9.02
---------- --------
- ------- ------- ------- -------
---------- --------
- ------- ------- ------- -------
TOTAL RETURN(c):........................... 8.12% .83%
3.90% 11.55% 12.18% 11.21%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $915,779 $871,145
$51,673 $61,297 $33,181 $28,971
Average net assets (000)................... $892,079 $ 95,560
$55,921 $46,812 $29,534 $23,428
Ratios to average net assets:
Expenses, including distribution fees... 0.96%(b) 0.98%
0.84% 0.84% 0.86% 0.85%
Expenses, excluding distribution fees... 0.81%(b) 0.83%
0.69% 0.69% 0.71% 0.70%
Net investment income................... 6.78%(b) 7.45%
6.48% 7.17% 7.51% 7.76%
Portfolio turnover rate.................... 70% 206%
80% 36% 187% 213%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions.
Total returns for periods of less than a full year are not annualized.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11
<PAGE>
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
- -----------------------------------------------------------------------------
- --------
Six Months
Ended
Years Ended February 28/29,
August 31,
- ----------------------------------------------------------------------
1995 1995
1994 1993 1992 1991
---------- ----------
- ---------- ---------- ---------- ----------
<S> <C> <C> <C>
<C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 8.60 $ 9.13 $
9.40 $ 9.17 $ 9.02 $ 9.00
---------- ----------
- ---------- ---------- ---------- ----------
Income from investment operations
Net investment income...................... 0.27 0.53
0.53 0.58 0.60 0.62
Net realized and unrealized gain (loss) on
investment transactions................. 0.39 (0.53)
(0.25) 0.35 0.37 0.26
---------- ----------
- ---------- ---------- ---------- ----------
Total from investment operations........ 0.66 --
0.28 0.93 0.97 0.88
---------- ----------
- ---------- ---------- ---------- ----------
Less distributions
Dividends from net investment income....... (0.27) (0.53)
(0.53) (0.58) (0.60) (0.62)
Distributions in excess of accumulated
gains................................... -- --
(0.02) -- -- --
Distributions from paid-in capital in
excess of par........................... -- --
-- (0.12) (0.22) (0.24)
---------- ----------
- ---------- ---------- ---------- ----------
Total distributions..................... (0.27) (0.53)
(0.55) (0.70) (0.82) (0.86)
---------- ----------
- ---------- ---------- ---------- ----------
Net asset value, end of period............. $ 8.99 $ 8.60 $
9.13 $ 9.40 $ 9.17 $ 9.02
---------- ----------
- ---------- ---------- ---------- ----------
---------- ----------
- ---------- ---------- ---------- ----------
TOTAL RETURN(c):........................... 7.75% .24%
3.03% 10.61% 11.27% 10.35%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $621,267 $ 705,732
$2,202,555 $2,680,259 $2,724,428 $3,127,587
Average net assets (000)................... $671,724 $1,735,413
$2,487,990 $2,670,924 $2,903,704 $3,432,948
Ratios to average net assets:
Expenses, including distribution fees... 1.63%(b) 1.66%
1.68% 1.69% 1.71% 1.67%
Expenses, excluding distribution fees... 0.81%(b) 0.80%
0.69% 0.69% 0.71% 0.70%
Net investment income................... 6.11%(b) 6.17%
5.64% 6.32% 6.66% 6.94%
Portfolio turnover rate.................... 70% 206%
80% 36% 187% 213%
<CAPTION>
Class C
---------------------------
<S> <C> <C>
August 1,
Six Months 1994(a)
Ended Through
August 31, February 28,
1995 1995
---------- ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 8.60 $ 8.69
---------- -----
Income from investment operations
Net investment income...................... 0.27 0.31
Net realized and unrealized gain (loss) on
investment transactions................. 0.39 (0.09)
---------- -----
Total from investment operations........ 0.66 0.22
---------- -----
Less distributions
Dividends from net investment income....... (0.27) (0.31)
Distributions in excess of accumulated
gains................................... -- --
Distributions from paid-in capital in
excess of par........................... -- --
---------- -----
Total distributions..................... (0.27) (0.31)
---------- -----
Net asset value, end of period............. $ 8.99 $ 8.60
---------- -----
---------- -----
TOTAL RETURN(c):........................... 7.80% 2.75%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............ $ 606 $ 204
Average net assets (000)................... $ 414 $ 111
Ratios to average net assets:
Expenses, including distribution fees... 1.56%(b) 1.63%(b)
Expenses, excluding distribution fees... 0.81%(b) 0.88%(b)
Net investment income................... 6.16%(b) 6.69%(b)
Portfolio turnover rate.................... 70% 206%
</TABLE>
<TABLE>
<C> <S>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the
first day and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions.
Total returns for periods of less than a full year are not annualized.
</TABLE>
- --------------------------------------------------------------------------------
12 See Notes to Financial Statements.
<PAGE>
Directors
Edward D. Beach
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Thomas T. Mooney
Thomas H. O'Brien
Thomas A. Owens, Jr.
Richard A. Redeker
Stanley E. Shirk
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Eugene S. Stark, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Ellyn C. Acker, Assistant Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributors
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Shereff, Freidman, Hoffman & Goodman
919 Third Avenue
New York, NY 10022
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852
The accompanying financial statements as of August 31, 1995 were not
audited and, accordingly, no opinion is expressed on them.
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
<PAGE>
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